Solar power capacity in Europe has grown rapidly over the past few years and the share of Power Purchase Agreements (PPA) have increased at an even higher pace. This trend is fuelled by a soaring demand from large corporates and a strong appetite from institutional investors to invest in renewable energy.
Why do corporates turn to PPAs?
There are several reasons why PPAs are so popular. First, the credibility of sustainability claim is regarded as high by many with additionality being an inherent feature for new builds. Second, PPAs allow corporates to take advantage of a long-term hedge with no upfront capital expenditure requirement.
But this does not fully explain why leading blue-chip companies like Google and Walmart are turning to PPAs. The true driver? It makes financial sense. PPAs save money from day one while delivering all the values described above.
Success factors for sourcing solar PPAs
Once you have decided that solar PPA is right for you, how do you effectively go about running a sourcing process? We have identified six critical success factors based on our experience from 30+ projects and more than 100 customer interactions.
- Start with why
Identifying the ‘why’ helps determine how you structure the requirement specification, what evaluation criteria you set, which suppliers you invite to participate in the Request for Proposal (RFP) process, and the stakeholder group you mobilize internally. Typical why:s behind solar PPAs include:
- Creating financial value in terms of savings and hedging
- Meeting sustainability targets such as the Science Based Targets initiative and RE100
- Enhancing resilience through storage, microgrids and other aspects
- Boosting brand value with an ever more demanding consumer landscape
- Evaluate project net present value
Do not simply compare price points, especially over price zones and between technologies. Calculate and evaluate net present value (NPV). NPV takes into account factors such as the expected increase in market prices over time, differences in pricing among price zones, and the effect of capture premiums or cannibalization.
- Focus on outcome
The beauty of the PPA model is that the whole solar value chain is encapsuled in one single price point. Make sure you leverage this in your approach.
Focus on the value and the outcome that you want to attain. This may include price per megawatt-hour (MWh), completion date, production profile and performance guarantees. There is no need to spend time “looking under the hood” of the various value chain components such as engineering, procurement, and construction (EPC) costs, panel technology or system design – leave this to the supplier to figure out.
- Limit the scope to PPA
Do not add ancillary services or storage to the scope of your project. Solar PPA is a standardized product. Ancillary services and storage are not, at least not yet. Strip the scope of your project to a bareboned solar PPA. This enables you to make apple-to-apple comparison of PPA providers and ensures the best possible conditions for negotiation. Storage and software can be added to a site at a later stage.
- Push risk and work to the provider
Do not get stuck at your desktop burdened with time-consuming analyses that PPA providers are infinitely more adept at doing – quickly and easily. When Walmart issued an RFP for an on-site PPA in the US, they only provided some general information about the various locations and then let bidders make all the technical assessments, calculation of roof strength as well as detailed technical design based on the information provided. This not only saved the retailer huge amounts of time, but also effectively shifted the risk to the PPA provider.
- Seek a partnership
A PPA is a long-term commitment. Typical PPA terms generally cover 10 or more years, which is why a good partner fit must be an integral part of your search for a PPA provider. You should look for a trustworthy partner who will support your needs throughout the duration of the contract.
This goes for the investor as well. You want an investment partner committed to owning the asset throughout the term – not one who plans to flip the asset after a few years. This provides stability and reduces reputational risk.
Alight Sourcing Guidelines
As increasingly more RFPs are being issued across Europe, we at Alight believe that a tender is the best way for most corporates to get the best possible PPA deal. To help corporates accelerate the sourcing processes, we created the Alight Sourcing Guidelines.
The guidelines cover the five standard phases of administering the RFP process – from planning to finalization, including tools and templates to help move the process forward quickly while minimizing risk.
Request your copy at firstname.lastname@example.org and help accelerate the transition towards a green energy future!
Johan Hernström, Client Executive at Alight
Johan advises large corporate clients in their transition to solar power via PPAs. He has more than 10 years of experience as a management consultant within sourcing & procurement. Prior to joining Alight, Johan worked at Accenture in Stockholm and before that within the Kinnevik Group.